“Gazprom” for freedom in the domestic market – Newspaper Kommersant No. 69 (7514) dated 04/20/2023

Gazprom, faced with a drop in exports after the outbreak of hostilities in Ukraine, wants to increase its revenues from selling gas on the domestic market. The company, according to Kommersant, proposes to the government to liberalize wholesale gas prices for industrial consumers in certain regions, introduce seasonal differentiation in wholesale gas prices, and launch a commercial balancing system. Now independent gas producers – Rosneft and NOVATEK – have the opportunity to offer price discounts and thereby lure away large consumers, while Gazprom is deprived of this opportunity.

Gazprom proposed to gradually introduce free gas prices for industrial consumers in the domestic market, follows from the materials of the State Energy Council dated March 30 (Kommersant has it). Vitaly Markelov, deputy chairman of Gazprom, expressed this idea at a meeting of the State Council, emphasizing that the gas industry “should shift the focus from an export-oriented model to the domestic market.” The top manager suggests starting the experiment with several pilot regions.

Gazprom declined to comment. Independent gas producers NOVATEK and Rosneft did not respond to Kommersant’s request. The FAS stated that the priority is to ensure non-discriminatory access to pipeline gas infrastructure. “The second mandatory step for the liberalization of wholesale gas prices is the creation of a representative indicator, which is possible within the framework of existing mechanisms. For example, due to the development of exchange trade in gas. At the same time, gas sales volumes of PJSC Gazprom on the stock exchange show a negative trend,” the service says. The FAS believes that without the fulfillment of these two conditions, “it is premature to talk about the liberalization of wholesale gas prices.”

Liberalization of wholesale gas prices has been discussed intermittently since at least the 2000s, but the reform has not taken place. Now Gazprom sells gas to consumers at a tariff set by the Federal Antimonopoly Service, with the exception of small volumes sold on the St. Petersburg International Commodity Exchange. Independent producers can sell gas at a free price, but in practice they are guided by the tariff and, when it is profitable, offer a small discount to it. At the same time, Gazprom, whose share in the domestic market is about 63% (377 billion cubic meters in 2021), is obliged to sell gas exactly at the tariff to all consumers, including in those regions where the tariff does not cover the company’s costs. In addition, prices for the population in most regions are below the economically justified level.

The population and domestic consumers account for about 19% of the total consumption in the country.

Mr. Markelov believes that as a result, independent producers are taking over highly profitable regions and pushing Gazprom out of the market, so price discrimination against the company needs to be eliminated, first in several pilot regions. All changes to the market, in his opinion, may require approximately one to two years.

Gazprom also proposes to introduce a seasonal differentiation of regulated wholesale gas prices, increasing the range of their fluctuations to 10–20% of the tariff level “in order to form a price level that exceeds the regulated ones”. The point is to form a “winter premium” for gas. This, according to the company, will also increase the demand for exchange trading. In 2017, the volume of trading on the exchange amounted to 20 billion cubic meters, of which 17.5 billion cubic meters were sold by Gazprom. In 2022, less than 6 billion cubic meters of gas have already been sold on the stock exchange, of which only 1.5 billion cubic meters were gas from Gazprom.

In order for consumers to plan their consumption volumes more accurately, Gazprom proposes to reduce the amount of non-extraction or excess consumption of gas allowed without penalty, while at the same time enabling consumers to sell gas they do not need on the stock exchange as part of a commercial balancing system.

Independent producers have previously argued that before introducing free domestic prices, it is necessary to liberalize access to exports and introduce transparent tariffs for transportation through Gazprom’s GTS. Now the issue of access to exports to Europe, after its fall by almost four times, has become less relevant. Gazprom has increased its production capacity in recent years to around 560-580 billion cubic meters per year, but due to a drop in exports in 2022, the company’s production in 2022 fell by 20%, to 412.6 billion cubic meters. With European buyers refusing Russian gas in 2023, the amount of free production capacity may reach up to 150 billion cubic meters. At the same time, independent producers increased their production in 2022 (see “Kommersant” dated January 10).

Thus, in any case, Gazprom will have to compete with independent suppliers in order to sell additional volumes of gas on the domestic market.

The loss of the European market by Gazprom has led to the need to sharply reduce production and take on the burden of balancing the market, said Vitaly Ermakov from the Higher School of Economics. “Not surprisingly, Gazprom wants to be able to use more flexible pricing that would allow it to compete with independents for end users and monetize its spare production capacity,” he notes. In his opinion, in the context of a supply surplus, increased competition should in theory lead to lower prices, but in Russian realities, the high concentration of gas sales on the stock exchange in the hands of several large sellers with the dominant role of Gazprom, most likely, will not lead to a significant drop in prices for gas. On the other hand, he adds, Gazprom will have the opportunity to expand its market share in the domestic market in the most attractive price zones in terms of netback – these are usually regions located close to production centers.

Tatyana Dyatel